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Month: December 2014

We’ve arrived in Rome for New Years Eve. It’s damn cold. Yesterday was the coldest day in Malta in 22 years. We’ve got no concrete plans for NYE. We’ll likely make our way to the centre, find a nice pub or wine bar and check out the colosseum around midnight. We depart for our cruise on the 3rd of January.

On the plane I was reading about global CAPE ratios. CAPE stands for cyclically adjusted price-to-earnings. It’s just a way to look at valuations of a specific market. The US is at 26.5. That’s quite high. That means that VTI or S&P is trading at 26.5 x its current earnings. The general idea is that investing in a basket of countries with low CAPE will return more than investing in a basket of countries with a high CAPE. It is shown that through history that investing in countries with CAPE levels lower than 7 returned a 30.1% CAGR the following year. Even recently, people who invested in Greece when its market collapsed and it was trading at a 2.x CAPE would have enjoyed a 30-50% CAGR the following year. It’s a hard thing to do, as a country with a low CAPE likely has a LOT of very current negative press like Russia and again, Greece right now. You’re going against the grain. However, there is likely more return opportunity in those two markets than there is in other countries. You’d definitely want to buy a basket of country ETFs not just a few. Like they say, “How do you get to a 90% loss, lose 80% and then lose half of that” Just because something is low, doesn’t mean it can’t get lower!

Aside from that, not much practical things there for me, at least not yet.. I don’t think I’ll be looking at investing into low CAPE countries anytime in the near future. If I do, it’ll require a lot more research and planning. Russia (ERUS or RSX) and Greece (GREK) do look attractive

I’m still entering portions of the 2015 portfolio. I have yet to enter the momentum and protector (Standard or Alpha) part and I’m only partially in the new SPY/TLT trade. I am waiting to do this during the 1st week of January when there is more volume and I can get a better sense of things. I might add a bond rotation portion to the overall portfolio as well. We’re targeting 4-6% a month with a bit of leverage (1.6x)

I’ve started constructing my trading portfolio for 2015 as listed above. I’ll be using 1.6x leverage for the Protector and Momentum portfolios. We assume an average of $800 per unit of SPY/TLT and we end up with a historical expected value of 4.91% per month in returns. Let’s see how we do.

Sorry for the lack of posts lately, I came down with a throat/chest and ear infection combo deal that had me bed-ridden for days. Luckily it subsided with some antibiotics right before Christmas day.

I’ve been spending a lot of time reading about active portfolio management. I’ve got three books on the go and one in particular that I’ve found quite interesting is “The Ivy Portfolio” by Meb Faber that talks about Ivy league endowments, and most specifically the Harvard and Yale endowments. Further to that, I’ve also spent time reading some research journals on momentum and 13F Cloning which are all quite interesting ways to obtain additional alpha.

13F cloning is basically taking the top 10 holdings of a hedge fund etc. These funds (over 100M) must report their holdings every 45 days. Since most aren’t actively traded, you can gain by copying their holdings and you don’t have to pay the 2 and 20 fees they usually have. Research shows that because you save on the fees and though its 45 days late, you can still generate around the same return. I’ve got a list of fantastic funds to follow, and thus I am interested in creating a fund of funds using the top 10 holdings of the very best funds like Baupost (Klarman), Appaloosa (Tepper) etc.

What makes me excited is our little insurance tool that we use in the Anchor strategy. This protects us in crashes (well really any market downturn). We usually only use a basic ETF like SPY or RSP but with the case of 13F cloning, mechanical investments and other methods of creating alpha that I am looking at, we can combine this insurance method and create more return with absolute protection in any major correction. That has me very very excited.

I am gearing up to setup a nicely diversified active trading and portfolio combination for Dec 31st/Jan 1st. I am excited about it. It should be a great 2015. Well diversified.

And for the first time on the blog, I’ll be finally doing some traveling! We’ve booked a cruise on Jan 3 till Jan 14 around the Med. We’ve done most of the stops before but it was cheap and we’ve got our Au Pair. So it should be awesome. I haven’t had a vacation in years where I wasn’t actively managing stressful trades. I am quite looking forward to it and doing a lot more heavy reading/research.

As I look now the futures are at 2071 suggesting a 2076 open @ fair value. Just a few days ago we touched 1976. That’s nearly a 100 point or 5% rise in a matter of what 10 trading hours? Incredible. I think the most market participants are jaw-dropped. It’s the way 2014 has been – the year of the V-Shaped rallies. Look at the chart below. That down was something else, but that up was even more sudden. I explain below the likely reasons for these rallies.

These types of rallies are by in large caused by a few things

1) short-selling and subsequent covering. It’s momentum. Once the bull starts to run, you get panic shorts hitting the stops and being forced to cover (buy stocks back) which further fuels the rally. As long as you have a large amount of skeptical bears in the market, you’ll get these violent rallies. This is typical of a bull run that has a lot of negative sentiment accompanying it ( i.e. like we’ve had the last few months : weak data, oil problems, Ruble problems). There’s a lot of shorts and if they break their stops, this causes violent upswings.

2) In the October fall, you had a lot of funds/institutional investors underweight equities after the very sharp reversal. It gave few any time to get back in and many waited for the typical pull back after the first fall. Most of the time on a downtrend that strong, you’d get a second leg or at the very least some stalls and retracements at fibonnaci resistance levels. They can only go so long for the predicted pullbacks until conceding defeat. This pullback did not happen in October, the up was relentless and broke all sorts of records. The under-weighted institutional investors perpetuated this rally as they chased it. The pressure to buy was strong. Simply put, the pressure to at least match the market is strong for these types of investors and they simply can’t underpform the market or else they look foolish. That fueled the rise in October and likely fueled this one as well. This fall was a gift for the ones still underweight and as soon as the selling pressure stopped you got a massive up-swing like we’ve seen the past few days. Everyone was hoping for a dip, they got it and the old adage ‘fool me once’ probably played a role in the even more sudden V-rally this time around. On just a bit of strength everyone pounced in. Nobody wants to miss the next V-rally especially after they’ve been praying for a large pull-back.

At close there was a p-bar that touched 212.97 on SPY. Likely that’s the target for this bull run. The season favours the bull as well. They call it the santa claus rally. I’d expect strength going into the end of the year.

I am out of the MIC and in just the SPY/TLT and Anchor trades at the moment. Yesterday was a good day for the anchor.

Well, the market opened about 23 points above yesterdays close. In just 2 days the market has gone from 1971 to 2042. That’s almost 75 points. Incredible. I’m glad I’m not managing an MIC right now with that gap up.

Right now I am working on constructing the details of a trading portfolio made up of a few different strategies. This will provide greater diversification, less active trading and more stability.

I am going to activate this portfolio on Dec 31st and post daily/weekly results here on the blog.

The SPX is about to close about 45 points up from the open. Incredible. That’s a 60 point swing from the overnight lows. I am so relieved to be out of the MIC trade. I just don’t think I can do that sort of trade any more. It’s too stressful and requires too much active management. I am now moving towards a trading portfolio that integrates the SPY/TLT pair trade, Earnings volatility trades, Anchor portfolio, intra-day breadth trades and a Momentum portfolio. My new focus during spare time will be on active portfolio management in these key areas and a lot less on having to be tied to the computer making adjustments and stressing about overnight moves. I’ve literally probably not slept about 5-7 nights in the past 60 days. If it wasn’t Japan introducing QE, or China lowering interest rates, it was the Ruble and Oil crisis. Just not healthy for me or my family. It’s definitely not worth the 3% a month stress.

MIC

We’re now fully out of the MIC. I don’t have the final numbers yet but it was profitable.

Anchor

We’re doing great here. We weathered that downswing like a boss. The market fell 5% and we were barely affected. This is a true “sleep at night” portfolio. I am coupling it with a few of my own tweaks

This will be the anchor of our trading portfolio. It’s what I’d do if I started a fund. It’ll slightly under perform bull markets but it’ll consistently return 8-12% during bear markets. Leverage this up and you’re sitting pretty in a completely insured portfolio.

TLT/SPY Pair trade

I was able to finally enter the TLT roll today as TLT fell from 127 to 126. We’re now up on the trade by about 8k.

Momentum Trade

I haven’t entered this yet. I’ll be adding this January 1st after I do more research and prep work.

Yesterday did not go like planned. There was a an 80 point swing from high to low that caused a lot of whipsaw pain as we closed our trade. They were quick and fills were a big issue. Incredibly annoying and a testament to why I am getting fed up with this trade type. I am over it. There’s better ways to make money in this market.

We’ll still close the trade at a profit but nowhere like we expected. It is what it is. The market opened at 198-199 and proceeded to go right to 202 and then back down to 197.8 in full swoops. Huge intraday moves. Hard to defend against. It was a shit show trying to remove the trade as the market swung wildly and I wasn’t able to get good fills as per usual during high volatility swings. Probably should have closed the trade earlier but overall it may end up being a wash having held over the weekend. We’ll see. Glad to end this type of trading for good. Not worth the 2-3% a month. Moving on to SPY/TLT, Momentum, Anchor.

ANCHOR

Anchor has performed so nicely during this down trend. My account from the highs to the lows of yesterday is only down about about 1%. I do use a bit of timing in how I go long on the equities. If market breadth and bullish percentages are trending down I’ll sell ATM puts as a replacement for my equity. So at about 206 I sold all my ES/F and RSP that were my longs and sold an equal amount of weekly ATM spy puts with lots of premium. This obviously protected me in the last downtrend. My account should have been down closer to 2.5% from the highs to the lows (half of the 5% down). So yeah, the downtrend (208.5 to 197.6) has produced around a 1% loss in balance. Love it. Takes 15 min of trading and a little monitoring and that’s it. The strategy is a long equity based strategy so any uptick in the market will start producing profits again. Over time, protecting yourself from loss is the key to success. It equates to more efficient compounding.

The TLT/SPY pair trade is doing as expected but is currently down. I closed the TLT portion @ 0.19 and am left with the spy portion. I wasn’t able to roll the TLT in time and I am waiting a little to see if TLT will reverse. The chart below suggests it might be ready for reversal (hanging man candle stick, overbought RSI). Once it does, I’ll enter another spread to offset risk exposure in the spy portion.

Since my opening post, the futures had fallen about 30 points and are now recovering. The high was 1994 and it had fallen to 1961.50 and currently sits around 1977.25. Another perfect open for us. Now we try and exit the trade.

I follow a few sources that I use when I have to make close call decisions on adjustments. The first is a market breadth indicator that I follow at www.sghammer.com and the other is cobrasmarketview. Right now the summation of all the info is suggesting a bit of a bounce right here. I am going to start scaling out of the trade.

== Update 9:05 am European Time ==

Futures are up about 0.4%. We’re entering the day a bit delta negative. We will be closing the trade throughout the day. We are looking at about a 5-6% return for the month. Not bad considering the SPX has fallen about 80 points in the past week. It helps offset the 9% loss I had last month.

We’re perfectly balanced on the anchor trade. An Anchor trade is where we buy the market (RSP), buy equal amount of ATM Spy Puts (insurance) a year out, then buy about 30% more insurance and sell an equal portion of weekly spy puts (30%) against this each and every week. When you sell insurance you get a premium which we call time decay. You get paid for the risk of selling insurance. We target enough premium each week to pay for the entire 130% of long insurance we purchased a year out. The idea is at the end of the year you have paid for the insurance and thus have had a relatively low risk way of having market exposure. The returns are quite astounding.

Refer to the ETFs hedged column. The results are even better as we’ve added new rules to how we sell the short puts that eliminate a lot of the whip saw you’d experience. We’ve bumped up 2011 performance and 2008 performance quite a bit.

Today will mark the day where I start to diversify away from being primarily focused on the MIC (modified Iron Condor) trade and more diversified into 5 different complementary trading strategies. I am looking to alleviate the time requirements of managing a heavy MIC trade. It’s something I am very looking forward to.

Another roller coaster day. During the open I just couldn’t get good prices for the spreads. It made sense, the market fell about 30 points and then recovered. We add a lot of adjustments and we’re heading into tomorrow. We’re slightly delta negative (we don’t like too much “up”) and we have an extreme amount of daily time decay. I’ll close tomorrow regardless. I can’t wait to get out of these large MIC trades. Getting tired of them. Looking forward to a nicely diversified lower maintenance portfolio.

==Update 9:36 Am EST==

What a perfect open. Looking at winding down the trade.

At close on Friday I bought a bit of VNR (vanguard natural resources) as it was trading below book value. It was good for about 1500 profit today.

It’s an hour before market open and the futures are acting perfectly for my trade. I’ll close today or latest tomorrow depending on the volatility collapse in the pricing as we edge near expiration. I’ll likely scale out through out the day but I don’t want to over pay to close the ‘way out of the money’ credit spreads. They expire Thursday and we’ve got room but at the same time, things are volatile and can turn on a dime. I’ll weigh the options at open (no pun intended)

Right now on SPX we have (SPX currently sitting at 2012)

1920/1940 Credit Spread

1930/1950 Credit Spread

On RUT we have (RUT currently sitting at 1157)

1055/1075 Credit Spread

1110/1090 Credit Spread

They should be able to be closed at a very good prices. I suspect I can end this trade at a very healthy return.

This marked the worst week of the year. The market fell ~4% or 70 SPX points right at the tail end of our trade. The silver lining is that it’s the best time cycle of the MIC to have been in. If it was the beginning or the middle, it’d be a lot worse. In fact, if things smooth over or if there is little downs we’ll likely end up with a much higher profit than possible before because of all the debit spreads (insurance) we bought on the way down. As long as the market doesn’t fall too much more in after hours as it already has, we’ll be A-OK.

Now on to Friday: Everything was good until about the last 20 minutes of trading. SPX was at about 2024 a very ideal and delta neutral area for us. I was very happy and looking forward to enjoying the rest of my night. All was good. All setup for the weekend. However, the market had other plans, It then proceeded to fall to about 2015 within 5 minutes. We started to prepare for an adjustment with 10-15 minutes left to go in trading. We got one through making us decently positioned @ 2015 with our next adjustment at 2000. However, in the last 2 minutes the market just collapsed and fell to 2003 and the VIX surged. 2003 is near but not quite our next adjustment point. I wanted to do another adjustment to get us right delta neutral before the weekend but the market fell so fast and within only a minute or two of close. In after hours trading the marketing fell another chunk to 1997 unfortunately, the market was closed and but we weren’t able to adjust. So within 20 minutes the market fell from 2024 to 1997. Not ideal. I am not hating our position as the next week is one of the most seasonal bullish weeks of the year but I don’t like going into a weekend being right at an adjustment point. It seems no matter how hard you plan to be risk averse, things can still bite you in the ass. The great thing is our theta is extremely high and should offset any movement.